Saturday, June 7, 2008

China Could Solve World Food Crisis Tomorrow

Media reports paint a misleading picture of a China running out of grain as a cause of high world food prices. China is contributing to world food price increases, but not in the way most people think. China has plenty of grain and it could solve the food price crisis tomorrow by dumping grain on the world market (an activity it was regularly engaged in a few years ago).

In sharp contrast to media reports, China actually has plenty of grain on hand. The Chinese grain authorities have warehouses with 150-to-200 million metric tons of grain (so they say), about 30-40% of a year’s consumption. This is about double the amount that the UN’s Food and Agriculture Organization recommends for a safe buffer stock.

Surveys conducted in April indicate that Chinese farmers have an even larger amount of grain stored in their houses and courtyards. China’s central planning commission (National Development and Reform Commission) conducts regular surveys of thousands of farms nationwide to gauge production costs, prices, sales, and grain inventories in order to keep its finger on the pulse of grain markets. A series of survey reports from about a dozen provincial and local price bureaus in a coordinated survey show that farmers generally have 1,000 or more kilograms of grain stored on their farmers as of April 1, 2008. (See table below. Three of the reports were posted on the NDRC’s official web site; I collected the others by doing a Google search of Chinese news sites.) The average was as high as about 2,000 kg. in poor provinces (Ningxia, Shanxi, Guizhou) and as low as 434 kg. in urbanized Tianjin. In Shandong and Hebei, two of the biggest agricultural provinces, farmers held about 1,200 kg. and these major wheat producing areas are about to add grain from this year’s wheat harvest which occurs this month. Rice-producing provinces of the south had plentiful stocks of 750 to 1500 kg.

China: average grain stocks held per farm, April 1, 2008

Province/region

Grain in inventory

Change from last year

Inventory as percent of last year's production

Kilograms

percent

percent

Shandong

1,185.5

-0.8

38

Hebei

1,275.6

7.9

35

Tianjin

434.0

-15.9

NA

Changchun (JilinProvince)

715.0

18.7

4

Shanxi

2,087.2

29.0

56

Ningxia

1,990.2

-2.2

28

Zhejiang

959.0

10.8

NA

Hubei

764.0

16.1

15

Hongze (AnhuiProvince)

1,304.8

18.5

20

Jiangxi

762.9

20.0

17

Chongqing

1,473.2

6.8

NA

Anshun city (Guizhou)

1,935.5

NA

45

Source: China National Development and Reform Commission, Production Cost Surveys

More importantly, the surveys also show that grain stocks were up sharply from year-earlier averages in most provinces. For rice, many of the reports said that farmers were holding grain off the market because they expect prices to go even higher—Chinese farmers are hoarding grain, restricting the market supply and driving prices even higher. In Shandong, grain stocks were down because demand for corn was strong and wheat production was down. In Changchun, a major corn-growing area, farmers had sold most of their corn too, but the report for Shanxi said farmers had had trouble selling their corn this year. Taking a simple average of these grain stock numbers gives us 1,240 kg. per farm. This is not a scientific sample, but it does represent a wide cross-section of farms.

The survey also suggests that a substantial proportion of China’s grain is stored on farms. I was able to calculate the ratio of grain stocks to grain produced by the farms for most of the provinces, and their reported stocks were generally in the range of 15-35% of their production.

The average from this survey might be a high (the survey sample probably over-represents major grain-producing households and excludes rural households that work primarily off-farm or grow fruits and vegetables). If we take the low end of this range, it seems plausible that 15% of the grain produced in China was still held in inventories on farms on April 1, 2008. That would be about 75 million metric tons in addition to the 150-200 million metric tons held in State Reserves. Thus, the total grain stocks in China could be 225-275 million metric tons, or 45-55% of the country’s annual grain production. That’s a lot of grain.

Bottom line: there’s a lot of grain sloshing around in China. In fact, by cutting off grain exports this year China is needlessly hoarding grain and driving up world prices. Inflationary psychology is making Chinese farmers into grain hoarders as well. China could solve the problem of high world food prices by dumping about 10 million tons each of rice and wheat (probably even corn) on the world market.